From the New America Foundation: Readying a Plan B for Economic Recovery

[Better Believe It]

Readying a Plan B for Economic Recovery
By Marshall Auerback, Senior Fellow, Roosevelt Institute
September 6, 2010

President Obama, his economics team, and the Chairman of the Federal Reserve continue to display a curiously detached view of the economy. Just the other day, the president indicated that “it took nearly a decade to dig the hole that we’re in” as if that provided an excuse for the lassitude he continues to display in regard to the problem of unemployment. By the same token, Ben Bernanke essentially admitted that monetary policy alone cannot keep economic growth moving, but seems curiously resistant to additional fiscal policy measures on the grounds that “fiscal impetus and the inventory cycle can drive recovery only temporarily.” He is wrong about that.

Essentially, our policy makers are making the case that the US government is not able to fill a greater proportion of aggregate demand with public spending on the grounds of “national solvency” and the corresponding need to “retain the credibility of the bond market”, as if the daily vicissitudes of the bond gods constitutes a rational basis for employment policy. Neither the administration, nor the Fed provide any substance to the now recurrent refrain that the government is “running out of money”. The mainstream debate chooses to focus on the “financial” aspects of these projected changes arguing that they will imply rising budget deficits which they define as being unsustainable. The “budget costs or outlays” are financial not real constructs. The relevant issue relates to real resource availability in the future or inflation, NOT national “insolvency”.

The US government can always “fill that hole” if it has the political will. As a sovereign issuer of its own currency, the government has all the capacity it needs. But this US government does not have that political will despite its rhetoric. The evidence for that is the persistent deficit phobia expressed by the president and his advisors, along with an undue reliance on monetary policy.

It is clear that Bernanke and Co. think that monetary policy is the main game in town. Unfortunately, this misguided faith in the Fed just ensures the perpetuation of bad policies which help our financial elites, but do little for Main Street.Much of Washington remains fixated on the “unsustainable” budget deficits, making it improbable that another stimulus package will be forthcoming. In large part, we believe, this is because the public is furious about the funding of the Wall Street rescue package. In that sense, the financial bail-out has “crowded out” more sensible spending policies. But in the face of today’s uncertainty, the private sector is understandably loath to spend, which is creating a huge drag on growth. Fearing for their jobs, individuals are paying down debt, not spending. Although we need to reduce private debt, when a few individuals increase their saving, we can safely ignore any macro effects because they are so small that they have only an infinitely small impact on the economy as a whole. But if everyone tries to increase saving, we cannot ignore the effects of lower spending on the economy as a whole. That is the point that has to be driven home. Only the government can step into the breach in this circumstance. When critics begin to talk about “wasteful” government spending, it is worth reminding them that there is no greater waste than persistent unemployment. It dwarfs all other inefficiencies.

Read the full plan at:

http://www.newamerica.net/publications/policy/readying_a_plan_b_for_economic_recovery